First of all we had the Mortgage Market Review to contend with – six months of speculation and worry about what it might mean, followed by the implementation on 26th April. Even though it has been live for almost two months now we still do not know the full impact of the tightening of criteria; application levels are still strong, and although it is taking longer to get deals through there is still a buoyancy to the market.
What is clear, though, is that banks and building societies are lending less now than they were before as clients have their incomes and outgoings stress tested far more thoroughly. So, having begun to navigate this new route, two further announcements added to the uncertainty.
Firstly Mark Carney, the Canadian Governor of the Bank of England, stated in his Mansion House speech that rates may increase, once the economy is more structured. He had been saying in the past that he wanted to keep rates low until the economy rights itself again, so this is a departure for him. However, consider his audience. The Mansion House Dinner is the City’s annual formal get together. I wonder if Carney was simply warning the lenders that even post MMR banks need to be even more realistic and careful about their lending. Carney is clearly worried about a housing bubble, and has acknowledged that housing in London poses the greatest threat to the UK economy at present. So by telling the banks that rates may increase before the end of this year he is trying to rein them in, without having to increase the base rate. Bearing in mind that Carney worked for Goldman Sachs and knows how bankers think this could be his warning shot.
“A rate raise and salary cap would not solve the problem in London ... but would seriously damage the market in the rest of the UK.”
Added to this you have the potential that the Financial Policy Committee (FPC) has been given the powers to force lenders to put in place a salary cap of 3.5 times a clients income. Again, I think that this is a warning - the Bank and the Treasury have a number of big sticks that could be employed to beat the lenders, but if the banks behave responsibly then the sticks go back in the cupboard.
Personally I think that a rate raise and salary cap would not solve the problem in London – there are too many cash buyers or those with large deposits to really bring down prices; however it would seriously damage the market in the rest of the UK. I view the combination of a rate raise and a salary cap as a form of chemotherapy, trying to kill the cancer of the London market – all it does is damage the rest of the body (country) and leaves the cancer (London) hurt but still alive.
I think that regulation and state guidance is very important in the mortgage industry and will help to keep it on the right path whilst growing the economy. Clearly self regulation does not work, but neither does state control. It should be the banks, without a tight regulatory framework, running the banks, with the regulators checking for capital liquidity, compliance risk and general market worries. State control will lead to a sluggish market that slowly kills the housing and mortgage industries, but still keeping properties out of reach for most people.
The elephant in the room is always that we need to build more houses, especially in the South East. Without this, it does not matter what restrictions are put in place, or regulations enforced or salaries capped – houses will still be unaffordable and the market will not be fit for purpose. And the only way to make sure that house are built in large enough numbers (as I am not sure that private developers will not want to flood the market with new houses all at once and therefore drive down prices immediately) is for the government to engage in a mass house building project, rather like after the First World War. Building houses puts so much money back into the economy as it is such a manual process, and so many other industries rely on it. Whether any government of any colour, though, would do this seems unlikely – presently it’s all about cutting spending, not increasing it. Whilst that remains the housing market will continue to be lopsided, the mortgage market will follow suit and any further attempts at controlling or regulating, I think, will just end up with the rich being able to afford more, with a gap opening up between them and everyone else.
So let’s hope for a comprehensive house building project, coupled with sensible regulation and capital restrictions for lenders. And let’s prepare for a rate increase and a salary cap with no further extension of house building, because that is what we may end up with. I’m keeping everything crossed to make sure that we don’t.
Mortgage Consultant, John Charcol
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